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Investing In What You Love

That’s what one legendary financier and patron of the arts told Bloomberg News in 2003. Through his money management firm he had amassed not only a fortune but also a stunning collection of modern American art, fueled purely by the desire to support living artists and to share their work with the public.

Ardent collectors of all stripes understand that kind of passion, even if they’re not buying million-dollar paintings: Whether pursuing a bottle of Château Lafite Rothschild, a signed first edition by F. Scott Fitzgerald or antique Shaker furniture, many have experienced the thrill of the hunt and the rush of ownership that, frankly, shares of a mutual fund just can’t provide.

Yet a fresh focus on the financial dimension has crept into discussions of such "passion investments" over the past two years. Many owners of objets d’art have increasingly become "investor-collectors," strategically seeking items that may provide long-term returns along with short-term pleasure, according to the 2010 Capgemini and Merrill Lynch World Wealth Report. With the right approach and the help of your Financial Advisor, you can both find the liquidity to fund aesthetic interests and take into account the inherent risk of holding them as bona fide investments.

The first thing to acknowledge is that the markets for artwork, rare wine, vintage automobiles and other collectibles are inconsistent and often illiquid. In many cases, future value depends on fashion and taste rather than cash flow and profits, so you won’t necessarily be able to sell the asset when you want to, or even know how much it might currently be worth.

"Passion investments get priced for their market value only if you are out there actively selling," says Ashok Rajan, Merrill Lynch GWM Investment Management & Guidance. "You won’t get a daily quote letting you know how your Picasso is doing." Of course, there are ways to make real assets more liquid, but relying on these types of investments as sources of cash could prove problematic, especially given the inconsistent and unpredictable nature of their markets.

While their markets may be unpredictable, real assets like collectibles should be included in personal net-worth calculations, especially if they make up a large chunk of your overall portfolio. Rajan points out that they carry a unique risk and potential return profile, which you need to account for as you build a more accurate financial strategy. "You need to harmonize them with the rest of your investments," he says. For example, if you find you have considerable wealth tied up in artwork — and even "blue chip" paintings can take time to sell at auction — you may want to balance that with greater liquidity elsewhere in your portfolio.

One way to do that, says Rajan, is to look at all of your assets and liabilities to make sure you’re not overweight in "aspirational risk.” You should make sure most of your assets can help you maintain your basic standard of living and your lifestyle.

If your portfolio is too heavily invested in aspirational risk, you may want to adjust your strategy for your next big purchase of contemporary fine art. For example, you may decide to boost your cash or other liquid assets so you’re not overexposed to riskier assets or investments that can’t be unlocked when you need ready cash. "The worst thing that can happen is to have to sell assets at a loss just to get some liquidity," says Rajan.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)